Social Policy in Ontario

Buried report reveals corporate giants gained the most from billions spent to support business in Ontario

Posted on April 7, 2016 in Debates

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NationalPost.com – Canada/Politics
April 7, 2016.   Ashley Csanady and Monika Warzecha

Of the nearly $5 billion a year Ontario spends on various direct and indirect business subsidies and tax credits, 200 of the province’s oldest and largest companies are the biggest beneficiaries.

That’s according to a previously secret blue-ribbon report reviewing the province’s “business support programs,” a messy mix of direct and indirect grants, tax credits, and programs and hubs designed to grow certain sectors of the economy.

So what does $5 billion a year buy the province — and taxpayers — of Ontario?

Read the full review of business support programs

Ask the Liberal government, and they say it provides thousands of jobs, global competitiveness and economic stability.

Talk to the Tories, and it’s “corporate welfare.” Quiz the New Democrats and it’s an opaque game of picking winners and losers that fails to keep track of promised jobs.

The experts both lament its necessity and suggest it’s “a race to the bottom.”

But where do these billions of dollars of public money go, and does it really translate to a better economy?

According to the “Report of the Expert Panel Examining Ontario’s Business Support Program,” too much of it goes to big businesses that don’t really need it at the expense of those who do. Though never previously released, it preceded, and in many ways predicted Auditor General Bonnie Lysyk’s 2015 report that found 80 per cent of all businesses receiving government support since 2010 were asked by the government to apply. < http://news.nationalpost.com/news/canada/vast-majority-of-ontarios-corporate-welfare-goes-to-small-favoured-group-of-companies-ag >

The report concludes: “Ontario’s business support programs favour the largest and oldest companies, the companies least likely to be in need of support.”
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Report recommendations:

-Establish explicit criteria for the launch and closure of business support programs.
-Ensure programs provide effective support to young companies.
-Conduct further research on the recipients and effects of its business support programs.
-Convene panels and provide them with data that will assist them in the judgment of the impact of programs on sectors, regions, and clusters
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Just in the last six months, from October to the end of March, the government has spent roughly $94 million on direct grants to businesses through the Jobs and Prosperity Fund and Southwestern Ontario Development Fund, according to National Post analysis. A large piece of that went to big, profitable companies: Ontario gave up to $15 million to Waterloo tech firm Sandvine, or 16 per cent of the direct business grants over that period. As Postmedia’s David Reevely revealed, Sandvine is doing so well it expects to pay out that same amount in dividends by the middle of next year.

It’s a case study that epitomizes both the auditor’s report and the never-released expert panel’s work.

Seen here for the first time, the government says the blue-ribbon report on business support was “never intended” to be public. But the academics who wrote it believed otherwise.

“I understood it was going to be widely disseminated when I agreed to chair the panel,” said Margaret Dalziel, an associate professor at the University of Waterloo’s Conrad Business, Entrepreneurship and Technology Centre. She said the report was submitted in July 2014, just after the election when the Liberals were bent on reforming government. That’s why the ministry says it was never released, but again, that’s not what Dalziel was told: “We were led to believe it was going to be shared.”

See Figure 1: Average Support by Revenue – <  http://wpmedia.news.nationalpost.com/2016/04/report-on-ontario-business-support.jpg?w=620&quality=65&strip=all&h=373  >

Report of the Expert Panel Examining Ontario’s Business Support Program

The report’s conclusions run contrary to much of the government’s rhetoric about supporting fledgling businesses, as it finds the companies who need the support the least gain the most.

“Approximately 200 companies, or 0.1 per cent of Ontario businesses, receive 30 per cent of total Ontario business support, and this does not include the significant incentive packages provided to companies like Cisco and OpenText,” the expert report states.

Among the big recipients, Cisco Systems stands out. The giant tech company is often held up as an example as the best and the worst that so-called corporate welfare or “business support programs” have to offer. As a recipient of up to $220 million in 2013, the funds were meant to keep jobs in the province and attract some 1,700 new positions. Members of the opposition called it “buying jobs.”

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The tangled web of government grants and corporate donations

There’s overlap between the companies that get government funding and the corporations that contribute to the parties. But it’s not as simple as tit-for-tat:
Linamar received grants from the Liberals in 2013 and 2015. Since 2012, they’ve donated to both the PCs and the Liberals

PCs

2012 Annual Period: $9,300
2013 Annual Period: $9,300
2014 Byelections: $9,975
2014 Annual Period: $9,975
2015 Annual Period: $8,300

Liberals

2014 Annual Period: $9,975
General Election 2014 : $9,975
2015 Annual Period: $5,500
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Amid recent debates about corporate money in politics, it’s worth noting that, since 2012, Cisco has donated roughly $64,000 to the Liberals through a series of donations that included byelection races and the 2014 general election. Of that, the maximum — $9,975 — was donated during a 2015 byelection in Simcoe North, far from any Cisco office. But the multinational has also given sums to the Progressive Conservatives and NDP during the same period, according to Elections Ontario documents, so no one is outside the bizarre web of grants, donations and corporate jobs.

“There’s no way that (donated money) could” influence those decisions, Economic Development Minister Brad Duguid said last week in an interview about what he calls the “strategic importance” of the grant system. He said approval is divorced from politics and largely done by bureaucrats, though he himself often courts companies to come to the province.

Yet, the Cisco example remains illustrative for two reasons: it’s often cited by critics and experts as the most overt kind of corporate grant, the one that both makes the case for and against the whole system.

“It’s kind of a race to the bottom,” Dalziel said. “When we give money to, say, Cisco, it is talking to a lot of jurisdictions” and trying to figure who offers the best overall environment, including wages and labour market and energy rates, among myriad factors. “If you believe that what we offer Cisco is no better than what another 12 jurisdictions offer, then it’s only who pays the most to get Cisco to come.”

“If we’re buying jobs, they’re very expensive jobs,” she added, explaining the average Cisco employee makes six figures and is employed in a sector of the economy with low unemployment.

Essentially, that means people making the national average family income of $76,000 a year, are subsidizing jobs worth much more. Again, she stressed it’s not necessarily that we shouldn’t use public money to attract private jobs, but that people should know more about it.

“Whatever your rationale is, you should articulate it. When you take money from taxpayers and give it to private business — especially private, profitable, foreign businesses — you should be able to articulate why you’re doing it and then you should also years down the road follow up and see that it worked,” Dalziel said.

But there’s no one place where all forms of business support, grants or otherwise, are listed and tallied. No clear set of criteria for their bestowal, as is the case in B.C. and Alberta. Even the list of the 374 grants the auditor general analyzed is not publicly available anywhere.

That opacity is precisely why opposition parties, experts and economists alike scratch their head at Ontario’s current system. Before the auditor and the expert panel’s report, there was the Jobs and Prosperity Council report in 2013, and before that finance guru Don Drummond’s massive report on transforming the public service, that included a long screed against the then-$4 billion frittered away on disparate economic supports.

It’s important to note that Ontario spends about half that cash on tax credits or foregone revenue, and another solid chunk on programs few take issue with— hubs like the Ontario Brain Institute that connect research with industry, or Communitech in Waterloo Region, which brings together start-ups and giants like Google. What is usually the issue is the millions given to companies providing shareholders with dividend cheques. It’s those direct grants that draw derision and the cries of “corporate welfare.”
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Government documents dating back to 2012 tracked the Jobs and Prosperity Fund and the Southwestern Ontario and Eastern Ontario development funds. These communities were among the most frequent recipients of business supports:
– Technology Triangle: Cambridge (13 companies), Kitchener (5 companies) and Waterloo (5 companies)
– Cambridge’s Grand River Foods received $1.3 million for facility expansion and new equipment
– OpenText, a Waterloo tech company, received $120 million to focus on global expansion and Research and Development
– The Kitchener facility of the German manufacturer Progress Werk Oberkirch AG (PWO Canada) received $616,865 for new machinery

London: 10 companies:
– Natra Chocolate was given a nearly $2.9 million loan to help it open a new manufacturing plant.
– $348,510 in funds was given to Artisan Metal Finishing to expand its facility and invest in new equipment and employee training
– The province gave Boler Mountain gave a grant of up $106,404 to create a new Treetop Adventure Park

Guelph: 5 companies:
– Linamar, an auto parts maker, received two grants: $50.25 million through the Jobs and Prosperity Fund in 2015 and $1.5 million from the Southwestern Ontario Development Fund in 2013
– Hammond Manufacturing was given a $1.5 million grant to invest in automated equipment to help it expand production
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Direct grants usually total somewhere in the neighbourhood of $500 million a year — not exactly chump change but just slightly more than 10 per cent of the total support detailed in the auditor general’s 2015 report.

Doling out that cash usually falls to Economic Development Minister Brad Duguid, who is a staunch defender of direct grants as a necessary cost of competing in a global economy. He can approve grants or loans up to $25 million, after which they need to go through Treasury Board.

“Frankly, we live in a global economy that’s so fiercely competitive… that we can’t afford to take the old approach,” he said. “You need to pick winners, you need to support your growth firms that help build our economy in the new economy.

He said he and his ministry have worked hard to increase transparency and streamline the system. But he also said that the biggest grants, the seven- and eight-and nine-figure ones that raise so many eyebrows, will by their nature eat up the largest chunk of cash. He also said that, by necessity, the largest grants will likely continue to go to companies he hears want to leave or are considering moving. More often than not, he’s not sifting through applications but seeking out companies to land.

“So the minister is a travelling salesman with a briefcase full of money?” wondered NDP finance critic Catherine Fife. “There (are) ways for government to be supportive to businesses without doling out briefcases full of cash.”

As the Kitchener-Waterloo MPP, she’s more than familiar with the tech sector and its needs and challenges, but she too raises the Cisco example and wondered, after recent global job cuts, how many of the promised positions remained. (Any inquiry with Cisco as to how many Ontario employees it had before and after the multi-million grant went unanswered, though other queries were addressed).

“If we knew that $220 million to a large corporation ended up with more jobs… then this conversation would be a different one,” Fife said.

That really cuts to the thrust of the issue: the seemingly random nature of the grant system, as Drummond first noted in 2012. The money’s also given out in so many different funds – Drummond lamented he struggled to find out about 44 of them – and with too little transparency.

Ironically, the most recent report, the one almost buried, also bemoaned that very fact.

Some progress has been made since the Drummond report, as the most recent panel notes, but its analysis also reveals there are still 65 separate business support funds doled out through nine different ministries. The fact the money is spread out over so many ministries is what makes it so hard to follow, and why there are so many vague estimations throughout this piece.

So the minister is a travelling salesman with a briefcase full of money?

The expert panel analyzed $4.1 billion in various supports in the 2011-12. Almost half, $2 billion, was non-refundable tax credits, $829 million delivered by “intermediaries” — innovation hubs and various specific government programs and institutes — $532 million was transferred directly to companies and $77 million “was allocated to four programs whose intent was not business support.” By the end of March 2015, according to the auditor’s report, total spending on economic support and tax credits hit $4.877 billion.

Duguid said the province has listened to the auditor, to the panel, to Drummond and has streamlined many grants under the “Jobs and Prosperity Fund” and is always working to make the whole thing more prosperous.

“If we want to to be globally competitive, we’re either in the game our out of the game,” he says of the grant system.

Micro-targeting specific sectors, whether it’s Ontario wine or biomedical science or information technology, is actually a good thing, Dalziel said, so the breadth of programs isn’t the issue, but the lack of central analysis and the fact the government does little to follow up on its jobs numbers.

Report after report says just that, yet little changes.

If people support corporate welfare, “then the government should at least ensure these companies are creating the jobs they are saying they’re going to create,” said Tory MPP Monte McNaughton, who has made something of a quest to reform these business supports in Ontario. He wants the data to be public and wonders if the legislature were to vote on each grant, even by mass motion, it might make things more clear.

Duguid counters that voting would politicize an ostensibly independent process, and wondered where the party truly stands on the issue. The new leader, Patrick Brown, was an MP in Stephen Harper’s government when it partnered on some of these grants, but his party has no official policy as it revamps its entire platform. Tim Hudak, the party’s last leader, constantly decried “corporate welfare” and even campaigned against it in the 2014 election. The move backfired: almost every time he’d raise the issue, it would turn out he was visiting a firm that, at one time or another, had received government cash.

“They’re going to keep handing out grants. We just need to make sure it’s transparent,” McNaughton said. He too has repeatedly asked for the list of all 374 grants and hasn’t gotten them. He worries they serve merely as a “slush fund” for Liberal-friendly companies.

The ministry did compile and provide the National Post with a list of all grants under the Jobs and Prosperity Fund since its inception and the Southwestern and Eastern Economic Development Funds since 2012. Some as-of-yet-unannounced grants were excluded, but overall the data shows grants are clustered both in areas of innovation and regionally in competitive ridings.

Cambridge, Ontario, for example received 13 of the recent grants, and neighbouring Guelph got 6, and Kitchener and Waterloo five each. It’s either investing in a growing region, or pouring cash to an area that doesn’t need it while ignoring smaller communities that might.

That’s what worries economist Mike Moffatt, a professor at the Ivey School of Business and a consultant on the auditor’s recent report.

“I think the big issue is it’s not clear to people why this is important,” he said, adding “how do you measure that it worked?”

“The government doesn’t do a great job in tracking outcomes.”

Since 2004, Duguid said the most recent numbers show Ontario has invested $2.8 billion in “business supports” which fostered $29 billion in private sector investment and created or retained 160,000 jobs.

That word — retained — is another with which Moffatt and other experts take issue.

“Where I tend to have more issues with it are things like the Cisco deal… it doesn’t seem any new jobs are being created,” he said, adding both because they tout “retained” jobs, but also because the tech sector has such low unemployment that if those people weren’t employed at Cisco they would likely have work elsewhere.

“There can be instances where it does make sense… now those instances would be in cases where you have a lot of unemployed or underemployed people in an industry and then you pay some money to attract that industry to come to your jurisdiction,” he said.

How do you measure that it worked? The government doesn’t do a great job in tracking outcomes

But he also noted, like Dalziel, that it’s a perfect conundrum, because companies like Cisco do pit jurisdictions against one another.

A statement from Cisco said it also poured $150 million into the province, including $13 million into Pan Am Games “legacy IT equipment.” It also suggested the provincial grant does, in fact, sway its position on where to settle, but that money is one of many factors: “The collaboration with Ontario allowed Cisco Canada to build an investment business case versus other geographies. Cisco chooses to invest in Canada and Ontario due to its collaborative governments, stable economy, distinguished educational institutions, skilled workforce and progressive immigration policy.”

Moffatt said, “The question for me is what happens if Cisco leaves, what happens to the industry footprint?”

Other provinces do it more clearly, or don’t focus resources on companies that are already winning. How Ontario goes about doing so, or if it even should, remains the $5-billion question.

< http://news.nationalpost.com/news/canada/canadian-politics/buried-report-reveals-corporate-giants-gained-the-most-in-ontario-business-supports >

 

Tags: budget, economy, globalization, ideology, jurisdiction, privatization, standard of living, tax

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